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Current Level of Inflation will Continue to Rise for Several Months says RBI

The Reserve Bank of India (RBI) has stated that the tapering of the Covid-19 second wave, combined with an active vaccination campaign, has improved the Indian economy's near-term prospects, although inflation is expected to "persist at elevated levels for some months," according to the RBI.

However, while several high frequency indicators of activity are recovering, a solid increase in aggregate demand is yet to take shape, the RBI said. “On the supply side, agricultural conditions are turning buoyant with the revival in the monsoon, but the recovery of manufacturing and services sectors has been interrupted by the second wave,” the central bank said in its ‘State of the Economy’ report.

While the June retail inflation was above the RBI’s 6 per cent upper band at 6.26 per cent, the RBI said a pick-up in inflation is driven largely by adverse supply shocks and sector-specific demand-supply mismatches caused by the pandemic. “These factors should ease over the year as supply side measures take effect,” it said.

The RBI said inflation ruled above the tolerance band during June-November 2020 and has again moved above the upper tolerance threshold in May and June 2021. “The sense is that inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the kharif harvest arrives in markets,” it said.

On the recovery, it said the aggregate demand aggregate demand conditions are recovering, spurred by unlock measures and the pace of vaccination. Average daily E-way bill collections improved substantially from June 20, 2021, reflecting the underlying improvement in economic activity. Intra-state E-way bills fared better than inter-state E-way bills, normalising to beyond pre-pandemic levels. Toll collections, too, posted a sharp increase sequentially in June by 35.5 per cent in volume terms and 21.2 per cent in value terms. Normalised to February 2020 levels, collections recovered appreciably from levels last seen in October 2020, the central bank said.

The economy is struggling to regain the momentum of recovery that had started in the second half of 2020-21 but was interrupted by the second wave. “The pick-up in inflation is driven largely by adverse supply shocks due to disruptions caused by the pandemic, including increases in margins and taxes. There are also specific demand-supply mismatches as in the case of protein-rich food items, edible oils and pulses, which are being addressed by specific supply-side measures,” the central bank said.

However, the RBI said “more needs to be done”. Elevated international commodity prices, especially of crude, are also imparting cost-push pressures. These factors should ease over the year as supply side measures take effect. Furthermore, a solid increase in aggregate demand is yet to take shape. Even with a 9.5 per cent GDP growth in 2020-21, there will be substantial slack in the economy and demand pressures may take some more time to become evident, it said.

On the global scenario, the RBI said the global economic recovery is getting stronger but remains uneven and unequal. Amidst pandexit challenges, rotation in demand from services to goods has averted a sharp drop in activity. “The Euro area is emerging as the new growth centre, along with some EMEs where vaccination is fast paced, but a few large Asian economies are beset with renewed surges of infections and consequent lockdowns,” the RBI said.

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